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Retirement: What you can do after leaving a company to secure your finances

Christine Benz, Director of Personal Finance & Retirement Planning at Morningstar, joins Yahoo Finance Live to talk about what to do with your finances after you leave a job.

Video transcript

KARINA MITCHELL: Welcome back to Yahoo Finance. Well, the pandemic has changed the way many of us look at our careers, as signaled by the great resignation. But if you decided to switch jobs or are planning to do so, or you're retiring earlier than you might have thought, don't forget about your 401(k). Here with what we need to know is Christine Benz, Morningstar director of personal finance and retirement planning. Thank you so much for your time. So some statistics that I'm looking at surprise me. Workers have left about $1.35 trillion just floating around because they leave their jobs and forget about their 401(k). So if you have left your job or you're about to do so, what should we do right away?

CHRISTINE BENZ: Well, definitely don't leave the money behind. You have a few options when you leave a company with respect to retirement plan savings that you have. You can roll the money over into an IRA. That's often the easiest simplest way to go. So you would just simply choose another investment provider, and then you can do a trustee to trustee transfer, where you just roll the money over. It's pretty seamless.

If you are planning to move to another employer, it may make sense to roll over into that employer's plan. The key thing you don't want to do is that if you're younger than retirement age, so if you're younger than 59 and 1/2, don't take the money and run, even though it might look like something that you want to tap for your living expenses. If you're pre 59 and 1/2, you'll owe taxes and a 10% penalty on those early withdrawals. So never do that, unless you can possibly avoid it.

ALEXIS CHRISTOFOROUS: Yeah, definitely good advice there. And sort of the same principle, Christine, applies to Social Security, right, which you can start to claim benefits starting at age 62, but more and more people are waiting to retire. So what should people do when they're thinking about the time horizon, just start getting that Social Security check?

CHRISTINE BENZ: People often like to start earlier. In fact, when we look at the data, we see that most people start as early as they possibly can at age 62. It does make sense in many situations to delay, especially if you think that you have average or above average longevity. And importantly, if you have a younger spouse, it often makes sense to hang on at least a few years, ideally to your full retirement age or even up until age 70.

And the benefit of doing that is that you can enlarge your benefit from Social Security. And it's a lifetime benefit. If you live to be 110, that'll still be your benefit. So retirees hate to hear that they should delay, but it's often the best financial idea. And it also reduces the demands that you place on your investments and your savings because your paycheck from Social Security is larger with that delayed filing date.

KARINA MITCHELL: I was surprised to learn that there are so many people when they're first starting out their jobs don't even bother participating in the 401(k) and the match that goes with it. So, you know, for me, it's kind of easy to understand when someone leaves their job, that they weren't really thinking about it or they weren't really contributing too much to it. Or if you have a pension, let's say, that you don't really look at if you're a part of a union, it's easy to forget. But how easy is it to recover those funds if you've stepped away?

CHRISTINE BENZ: Well, you will need to do a little bit of investigation, but you're absolutely right on the people who don't contribute in the first place. The good news is that increasingly, people are getting opted in. So even if they're doing nothing, which is often the path for many workers who have other things on their mind, they're getting opted in. So you may not even be aware that you have been opted into an employer plan. The money is just coming out of your paycheck. So definitely check on that. There may be some slippage. People might leave funds behind because they haven't realized that they were contributing through auto enrollment in the first place.

ALEXIS CHRISTOFOROUS: And Christine, as we get older, as we head into retirement, healthcare sort of takes over a larger part of our overall household budget. So how should folks be thinking about healthcare expenses? How much liquid reserves should they have and invest in those later years?

CHRISTINE BENZ: Right, healthcare is such an important consideration. What we see is that people obtain pretty good coverage through Medicare. Oftentimes, their health care outlays, especially early in retirement, may actually go down relative to what they were when they were working. The tricky part is that as we age, we do tend to incur higher healthcare costs. And the real wild card in all of this is long-term care expenses. So if you need care that is not healthcare, it's not Medicare provided, but if you need help doing things like making meals or taking showers, none of that care is covered by Medicare.

And that is the big risk factor, especially for sort of middle income to upper middle income retirees, who are going to need their retirement savings. There, perhaps some sort of long-term care insurance product makes sense. At a minimum, if you're planning to self-fund those expenses, make sure that you're segregating those funds from your spendable funds because you need to leave yourself a little bit of a buffer in case you have these costs toward the end of your life.

KARINA MITCHELL: OK, Christine Benz, helpful advice there, Morningstar director of personal finance and retirement planning. Thank you so much for your time.

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